Questions -
Q1. Mariah Company contracted with Andre Corporation to construct custom-made equipment. The equipment was completed and ready for use on January 1, 2013. Mariah paid for the machine by issuing a $220,000, three-year note that bears interest at the rate of 5%, payable annually on December 31 each year. Since the machine was custom-built, the cash price was unknown. However, when compared to similar contracts, 8% was deemed to be a reasonable rate of interest.
Required:
1. Prepare the journal entry by Mariah to record the purchase of equipment.
2. Prepare journal entries to record interest for each of the first two years.
Q2. On July 1, 2013, Walter Allen Inc. purchased 6,000 shares of the outstanding common stock of Piaffe Corporation at a cost of $140,000. Piaffe had 30,000 shares of outstanding common stock. Assume the total book value and fair value of net assets is $650,000. Both companies have a January through December fiscal year. The following data pertains to Piaffe Corporation during 2013:
Dividends declared and paid, Jan. 1 - June 30 $12,000
Dividends declared and paid, July 1 - Dec. 31 $12,000
Net income, Jan.1 - June 30 $14,000
Net income, July 1 - Dec. 31 $18,000
Required:
1. Prepare the entry to record the original investment in Piaffe.
2. Compute any goodwill on the acquisition.
3. Prepare all other entries for 2013 under the equity method.
Q3. The following facts relate to gift cards sold by Dover Saddlery during 2013. Dover's fiscal year ends on December 31.
(a) In October 2013, sold $3,000 of gift cards, and redeemed $500 of those gift cards.
(b) In November 2013, sold $4,000 of gift cards, and redeemed $1,400 of October gift cards and $700 of November gift cards.
(c) In December 2013, sold $3,000 of gift cards, and redeemed $200 of October gift cards, $2,000 of November gift cards, and $400 of December gift cards.
(d) State Line views a gift card to be "broken" (with a remote probability of redemption) two months after the end of the month in which it is sold. Thus, an unredeemed gift card sold at any time during July would be viewed as broken as of September 30.
Required:
1. Prepare all journal entries appropriate to be recorded only during the month of December 2013 relevant to gift card sales, gift card redemptions, and gift card breakage.
2. Determine the balance of the unearned revenue liability to be reported in the December 31, 2013, balance sheet.